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The latest report from Standard and Poors (S&P) reveals that more than half of active equity managers failed to beat the market.
The S&P SPIVA scorecard assesses how well expert teams, known as active fund managers, performed against a straightforward measure—the performance of the market itself, represented by the market index. In the first half of 2023, 55% of these funds underperformed the S&P/ASX 200, a key Australian stock market index. This underperformance rate increased to a staggering 81% over 15 years.
Active fund managers are experts who meticulously select which investments (stocks or other assets) to make, hoping that their choices will outperform the market. Think of them as professionals actively managing your investments with the goal of achieving higher returns.
Index funds involve investing in the entire market, spreading your risk and reducing the chance of significant mistakes. They typically charge lower fees because they don't need to make complex investment choices like active managers. Instead, they aim to match the average performance of the market, which, as revealed in the S&P 500 scorecard, often surpasses what active managers achieve.
Why Active Funds Often Fall Short:
Active fund managers face challenges that often limit their ability to outperform the market:
Fees:
- Fees: Active managers charge higher fees for their expertise, which can eat into your investment returns.
- Market Efficiency: Today's markets are highly efficient, this means that most information about a stock is already reflected in its price. This makes it challenging for active managers to identify hidden opportunities.
- Herd Behavior: Active managers may feel pressured to follow popular investment trends rather than making independent, well-researched decisions.
- Overtrading: Some active managers may engage in excessive trading, incurring transaction costs and taxes that eat into returns.
- Concentration: Some managers bet heavily on a few investments, making your returns vulnerable if those investments don't perform well.
When Should You Consider Active Funds?
While index funds are generally a solid choice, there are situations when active managers may provide value, particularly in less efficient markets or during turbulent times like market downturns.
In retirement, securing your investments while ensuring a steady income is paramount. The latest S&P SPIVA scorecard reminds us that even smart and well-paid active fund managers can struggle to outperform the market. Index funds offer a straightforward and prudent way to participate in the financial markets, especially if you're seeking safety and cost-effectiveness. Nevertheless, it's crucial to remember that there are times when an active manager could assist you in navigating specific investment challenges. Ultimately, the key is to find the right balance for your retirement goals and financial peace of mind.
Reference: https://www.spglobal.com/spdji/en/spiva/article/spiva-australia/
This blog contains general and factual information and does not take into account anyone's individual objectives, financial situation, needs or tax circumstances. We strongly recommend you contact one of our Advisers if you would like personal advice.
Redpoint Investment Holdings Pty Ltd (trading as CY Financial Advice), is a corporate authorised representative (No. 378099) of CY Financial Services (AFSL No. 509648)